Memoirs Of Newbies Venturing Into Arbitrage Rentals

This is all in the voice of Angelo Wong.

I’m at the Narita airport right now with some time to kill, and my business partner Andrew Wong wanted me to write on our real estate journey a bit, and how we went from zero to having 1.5 SFH each, with 7 rental arbitrage units (more on that later) 2 years later.

Since documenting the entire 2 year journey will basically be a novel, I’ll break it down into a few posts, stopping where it makes sense.

Motivation

Andrew works at Google and I work at AMD.

Our motivation behind real estate is to convert working into an option as opposed to a requirement.

I think Andrew likes his gig at Google and might continue it well into his financial independence. I like my W-2 gig a bit less.

My company went through a rough time a few years ago and I saw a bunch of my friends get laid off. As they got laid off, they also got deported since their Visas expired. Although I’m a US citizen, I realized I only have 1 source of income, and in the event I got laid off I would be screwed. Financially, I wanted some sort of cushion to fall on so at least I could prolong finding another job indefinitely if I were to get fired. The other thing I don’t enjoy about my W-2 is that it’s more seniority than meritocracy. The first 2 years I obliterated my peers in terms of work done and the impact of that work. Pretty much everyone agreed that I was one of the best newer engineers they’ve seen—but in those 2 years, there was not a single promotion, or a raise. And the excuse was: there’s other people in front of me to be promoted so I can’t also be promoted at the same time. In other words, my W-2 is a zero sum game, and even if I worked there for 30 years+, it’d never touch income one would get from Google, let alone a lucrative real-estate career.

Essentially, Andrew started real estate from a good place and I started it with a chip on my shoulder.

The First “Deal”

So I actually started the whole real estate thing a little bit earlier than Andrew. With a chip on my shoulder, I started going to Meetups circa September 2015 and started absorbing information. Then I went to a Marshall-Reddick Meetup and they pitched people some Turnkey deals (spoiler alert: their deals suck for me). But that Meetup taught me stuff like cashflow markets vs appreciation markets and the very basics of real estate. It also gave me a list of actual locations to research upon so I know where to invest.

So I did a bunch of researched and settled on Memphis as it seemed like a great cash flow market. Only knowing Marshall-Reddick as a real estate connect, I just perused their listings and eventually settled on a 5% CoC SFH.

While I was shopping for a deal with Marshall-Reddick, I was telling Andrew about this and he shot me a link for Bigger Pockets. He said that Reddit says it’s a great real estate forum. And it is. I posted some deals I was looking at, and questions that were entirely too dumb to be on a forum, and yet the BP community has time and again given extremely valuable advice, and with great speed.

Before I signed the Intent to Purchase, I met up with Andrew to eat and he said he wanted in on this deal. The 5% CoC looked amazing to me because of the Marshall-Reddick batch, it is their cream of the crop. They’re usually 1-3%. So we split the deal 50-50, right down the middle. Reasons being:

• It makes life simpler.
• I mitigate my risk by halving the down payment (I’m not that rich), and I don’t necessarily care about massive returns on my first deal
• It forces me to close this SFH deal and to actually learn the process of closing.

This was around December 2015 when all the contracts were signed. But tenants moved in February 2016 due to delays and Chronic Excuse Syndrome by the turnkey company we were working with. The lesson here: follow up every single day.

OK so here are the numbers for the first deal:

$138,900 total, but we put 75% LTV.

Rent $1395, around 1% rule.

New rehab. Fairly new building (in 2000s I think).

The Second Deal

So with 5% CoC we wanted to look for better deals. Andrew bought his own place with Memphis Invest and was happy with it and I bought my own. I wanted to squeeze a little bit more CoC out and was willing to do a lighter rehab. I just cold-called realtors until I found a deal with good numbers.

So this deal fell on my lap: couple is moving to another state and was willing to sell me a $140K ARV for 30-day closing at $118900.

I took the lesson from the previous deal to heart and followed up with Wells Fargo and anyone I could think of, every single day until things were going faster than anticipated. End of the first week, the appraisal report was in and everything looked honky-dory.

Then everyone at WF went on vacation and stopped responding to messages, causing delays and the sellers (and the realtor) to be mad at me. The lesson learned here? Follow up every day and anticipate any vacations that might come up and get your backups contacts and double check the backup contacts are not on vacation. The squeaky wheel gets the oil. The other lesson: don’t buy in August since everyone goes on vacation.

After some pain, here are numbers:

80% LTV on $118900

Rehab around $12k.

Rent $1610/mo.

This was closed in August 2016. But even with this, it was my and Andrew’s realization that it would take forever to be financially independent buying up SFHs like this. Since we wanted to enjoy life before we were old, we were open to other strategies like MFHs and the magical unicorn: Rental Arbitrage.

Rental Arbitrage

So it was around April 2016 when J Martin told Andrew and I about this rental arbitrage thing. Basically what you do is you lease a place, furnish it, and then lease it back out at a higher price. Then you make the spread between what you’re paying a landlord (rent, utilities, etc) and what the tenant pays you for the furnished rental.

Dope. No need for 1-month long closing. No need for headaches. No need for hundreds of pages of paperwork. No need for massive amounts of capital to throw into the 80% LTV. And the cash flow is better.

We thought it was cool J did what he did but we still just did SFH back then and we were still doing our own 2nd SFH. So we kinda threw that in the backburner.

I volunteered circa August 2016 for J Martin’s sfbaysummit event that he has had the last 3 years. He talked about his short-term rental operation in much greater detail. Now that I’m at the end stages of closing this 2nd SFH, I actually listened much more intently. Also, I listened much more intently because when J Martin officially retired from his 9-5, he stood up during Johnson H’s meetup, told everyone he has officially quit his job, and that he was gonna leave right then and there to go travel and while he was walking out and dropping his mic, he was playing the ukelele as he left.

So yeah, that conversation ended my world. His model is so simple and seems like something that could definitely be done. So I hyped this up to Andrew, my business partner before the summit and he kinda listened, but during the summit is I think when we committed to doing this rental arbitrage. Al Williamson was there and talked about the numbers of short-term rentals, and J made the operation seem simple enough that by the end of the summit, we were both salivating.

Getting Our First Arbitrage

So the summit was August 2016 and we wanted to get started doing this rental arbitrage stuff. Over the course of 2 months, we called a bunch of landlords, trying to sell ourselves as basically people that will reduce their vacancy to 0% and also take care of small issues for them. So they get paid, and we are going to be less hassle than the normal long-term tenants. We’re also not one, but TWO Bay Area engineers so they can be confident that we can pay even if we go vacant 100% of the time.

So we went to a bunch of showings, and at the beginning we both wanted to be there to look at the units so we can unanimously agree on whether or not we would pull the trigger on “the first one.” Lesson learned here—that’s probably a waste of time in the long term. I just go now and take pictures, send it to Andrew and we either approve it or we don’t.

So after 2 months of looking at units, we finally got our first unit on October 15th, 2016 (my 27th birthday). I spent my birthday shopping at Ikea and furnishing the place.

We used to care soooo much about the little details—where the table should go, where the extension cords should go, where the USB chargers should go, and have endless conversations about it. Now, we just throw things in as we see fit, and the tenants can move it around if they want. It’s comical: with each move, we care less and less about the specific, tiny, minute details. Perhaps a bad thing.

How Our First Arbitrage Did

So the unit we got is a 1bd/1ba cottage. It did pretty well. Unfortunately we couldn’t renew the lease due to the fact that the landlord was moving in his in-laws into his…in-law.

Here are some numbers:

$1945/mo.

$2500 to furnish the place. We bought a bunch of used stuff back then. Now it’s all new since that’s more scalable.

It took a little bit of time to get our first booking (10/26/16), and we were super stoked. $91 a night for 30 nights.

This ironically ended up being our best unit—so much for how your “first deal is your worst deal”—someone booked the unit for 9 months in February of 2017 all the way until the last day of the lease. So that murdered the vacancy.

In the arbitrage model, at least in the areas we operate, we are extremely sensitive to vacancies. Each day of vacancy is bleeding out $70 (roughly $2100/mo). If we were to net profit, say, $30/day when it isn’t vacant, we are saying we need about 2.3 days of occupancy per day of vacancy to break even.

This unit has a special place in our hearts because it’s our first. Here are some lessons we learned from this unit:

• We spent way too much time sweating the small details and saving a couple hundred of dollars buying used; time is more valuable and we just buy new now.
• Every extra day we spent furnishing loses us significant money. So it’s much better to furnish it very quickly than to take our sweet time shopping for deals or being indecisive on furniture.
• This particular landlord was surprised at what we were doing with his unit, even though we were upfront and explicit about it. This was back in the day when we didn’t know not to use poison words like ‘Airbnb’ so we were being overtly explicit.
• Small-time landlords may not worth the hassle. They can change their mind easily and they care about stuff like ‘I have kids at home so I don’t want strangers in my cottage.’ Though the tenant we got since February was asked to babysit for their kids so they seemed pretty close.
• Smaller landlords are less professional especially if they only rent out one in-law. They were slow to respond to issues that arose and we basically had to drive out to the unit and take care of a lot of menial tasks ourselves. This was about a 45 minute each way and was extremely irksome. We Taskrabbited a few tasks; however, the landlord wouldn’t respond to our maintenance calls but would just show up, so we ended up wasting money hiring Taskrabbiters. Poor communication is the worst thing about smaller-time landlords.
• We tried to clean the unit ourselves to get a feel for what needs to be done and to create a checklist. This was a bad idea. Cleaning sucks. Hire it out as fast as you can.